The importance of undertaking joined-up contract reviews and mid-course correction
Everyone who knows what PFI stands for now knows that we are into the beginning of a 30 year journey of expiring contracts - who hasn’t seen the graphs by now or considered the scale of the industry challenge with total lifetime contract value almost equal to the cost of the UK Government’s response to the first and second waves of Covid-19?!
Our successful delivery of the first large-scale PFI expiry (PRIME) in 2018, sharing of our experience and lessons learned with the IPA’s Government network, and subsequent decision to set up CURSHAW’s PFI Expiry practice and our ebook - written for an industry readership, feels like a very long time ago. Nowadays you can’t move for commentators, often not those faced with the risks and opportunities involved or with direct, practical experience, talking about the juggernaut of expiry; and much of what’s produced and said ignores or pays limited lip-service to the importance of managing PFI contracts effectively now, how to do this in the public sector and with the public sector, and how for a great many PFI contracts mid-course corrective action on both sides of the Project Agreement may be necessary and beneficial for contracting authorities, PFI and service providers alike.
For some projects it is too late, expiry is too close leaving no time for a mid-course correction and worse still there may be insufficient time to prepare properly for expiry; indeed 19 of the 21 projects expiring before the end of 2024 were rated Amber to Red as part of the Infrastructure Project Authority’s (IPA) Expiry Health Check Process. For these projects and potentially for some of those expiring in the next 5 years the road will be bumpy and the focus may need to be on damage limitation and the enactment of contingency plans. Many projects will be rolled over with Contracting Authorities, by default, with interim or bridging agreements potentially without the commercial protection around availability afforded under PFI and potentially for periods of time that may be insufficient to properly design the eventual and overdue post-PFI target operating model.
What’s clear is that we are all on a journey here and learning as we go. Now the received wisdom is that preparation for expiry should start 5 to 7 years out from expiry and handback. All the contracting authorities with expiries between now and 5 years hence can and perhaps should therefore be forgiven but with the commentary from Government oversight bodies such as the NAO and the PAC and indeed the guidance from the IPA, history may not be so kind for failure to prepare adequately for expiries beyond 2026/7.
Our Curshaw view is that the expiry process should start with near perfect knowledge and understanding of contractual compliance supported by transparency of data and a functioning and collaborative relationship between contracting authority and SPV and through SPV managers and FM Cos. The contracting authority should be intelligent and informed, firm and fair and have confidence in performance and service levels until the very end when they embark on the expiry process. Business as usual contract management should be neither lenient nor adversarial. The challenge is twofold:
Contract Management is much maligned and has suffered from under investment in training and deployment of business procedures and process and systems and advice on how to produce and use contract management plans and contract bibles to best effect. The NAO remarked that “Traditionally, the procurement profession has been of low status in the civil service, while contract management has been seen as low status within the procurement profession.” Nowhere is the risk arising from this greater than than on long-term and complex contracts like PFI. This weakness is acknowledged with the UK Government Commercial Function now investing significantly in training for non-commercial Senior Contract Owners who are accountable for operational performance. It is also encouraging to hear from the Infrastructure Projects Authority that they are now developing bespoke training for PFI contract management - whilst this is necessary it is not clear to us that is sufficient to address the problem. More than just training is needed.
Performance reporting by providers and SPV managers in many cases makes it hard for contracting authorities to identify patterns and trends with areas and assets and harder still for contracting authorities to understand the root cause of performance issues. There is limited reporting of shared risks and upcoming challenges that will affect all parties of the kind you’d expect to see as the basis of governance where there are functioning and effective partnerships.
Our CURSHAW view is that you can overcome these challenges by:
1. Doing a review and doing it early to set you up for an E3 (efficient, effective and equitable) handback and expiry.
Baseline performance so it is clear if any performance issues need to be addressed. Do it early and long in advance of expiry where the stakes are higher and the risks to either side are greater than at any other time in the life of the contract. With expiry the public sector is faced with potential operational disruption and contract-end financial liabilities and the private sector is faced with financial uncertainty arising from settlements and account closure, stranded labour etc. In our view the risk of mutually assured destruction, for this is a non-zero-sum game despite the prevailing discourse around sides and us v them, is greatly minimised by both sides having a firm grip on business as usual (BAU) contract management and BAU service delivery
Know that if you don’t review the contracts issues around BAU will run into expiry and have a bearing on the time and energy that might otherwise be spent on planning for what comes next, demobilisation and cutover, procurement of a post-PFI operating model and mobilisation. Expect in the absence of a review and clarity on performance in advance of the expiry process that the effort involved in and required by expiry to be higher than would otherwise have been the case. Fail to prepare for expiry preparation then prepare for expiry to fail.
Work to our standard, developed with and for contracting authorities and providers to drive your review. This is necessary so there is an understanding of what good looks like, the key performance elements and the sub-elements (including hard and soft measures). Doing this will ensure that others see your contracts as you do and there can be no doubt as to whether they have been managed and operated effectively. With each passing expiry there will be a greater understanding of what good looks like and an increasing need for contracting authorities and providers to ensure that their contracts are seen as performing well.
See the bigger picture and acknowledge the importance of collaboration the whole way through. The review should be the beginning of a long and collaborative relationship. It could even be used as a reset. Breaking the relationship before the expiry process has begun would be very short sighted because expiry has the potential to be a great deal more complicated than BAU contract management
2. Both contracting authorities and providers working together to undertake the review. Use independent experts where required to facilitate a joint review and work to a common and accepted standard.
For the process to be meaningful and worthwhile, providers and contracting authorities must work together on the exchange of information and be prepared to consider how the partnership can be improved.
If necessary an independent facilitator should be used as an independent intermediary to ensure that parties address awkward home truths positively as an alternative to a contractual and paymech oriented approach.
3. Use the review to identify the necessary investments in systems and data to improve the interface between providers and contracting authorities.
It is encouraging that UK Government Commercial Function is offering PFI-specific contract management training; however training is no substitute for the tools required. It is likely that contracting authorities on undertaking a review will need to invest in changes to or the introduction of systems, processes and governance at the interface between one another. Parties may need to work smarter using technology solutions to drive focus on the areas that require remediation. Parties should ensure they have an up to date and fully conformed version of the contract. Affinitext could be used to document contract changes and avoid the need to and risk of relying on corporate memory to later down the line unpick the rationale and commercial basis for a contractual change and second guess the implications for expiry. Save fees on lawyers by being able to interrogate and interpret your contract easily with no version control issues. Extract contractual promises using software and assign them to named persons to drive accountability.
Great data and demonstrable compliance comes from great systems. It is highly likely that contracting authorities will benefit from SPVs and SPV managers working with FM Cos to provide meaningful management information rather than raw data in the form of extracts from CAFM systems. Since the 1990s things have moved on but is it not clear, at least to us, that PFI reporting has. Reporting can often be like Frankenstein’s monster with bits bolted on over time to a spine that the SPV is obliged to provide under contract. We have worked on non-PFI outsourced FM with some of the market leading FM and Estates Integrators who are accustomed to using presentation layers outside of the CAFM systems to spot patterns and drive insight. Without this this the transparency required, to focus collective attention at monthly performance meetings and liaison committees on the areas that really matter to the parties, will most likely be lacking.
4. Acknowledging and planning practically for the fact that Expiry isn’t BAU
Much has been made in NAO reporting on the preparedness of Government for UK expiry that the act of running and maintaining an asset is different from changing it and that asking BAU teams to deliver change runs the real risk of service degradation in the run up to expiry if BAU resource is diverted. We know that you can’t effectively, on larger and more complex projects, run expiry properly from BAU. There should be a separation of resource and duties. Adopting the right programme structure is essential to success. Only witht the right capacity and capability and skills mix can the totality of expiry be understood, planned for and delivered. We have observed project teams that have been given recommendations that they simply cannot address either because they don’t have enough people or can’t understand and interpret the recommendations.
So you’ve done your review and you are working through the mid course correction then what?
Sadly there is, at the time of writing, no expiry standard nor any guidance from any government oversight bodies on how to set yourself up for success and commence the expiry process - we hear of project teams wanting to know “what good looks like” and wanting to know how they should configure themselves and gain the required business case approval for the resources necessary by overcoming the ruinous focus on short term cost over long-term value.
We understand guidance is due to be published soon which is welcome news but it has not been developed with the private sector and it is therefore unclear to us what if any role for the private sector in expiry preparation is envisaged. We believe the IPA Expiry Healthchecks would have benefitted from the input of the private sector who own and operate the assets and have the access and therefore best understanding of all the operational and condition data. For the same reason the private sector must be involved in the expiry preparation exercise - not least because the handback schedules clearly lack the operational detail necessary for the migration of systems, data, TUPE, communications, contingency plans etc.
We have previously written about the benefit of using a joint (PFI Provider and Contracting Authority) balanced scorecard for running the expiry process to agree at the very outset how the expiry process should run and what would characterise an E3 expiry. Such a scorecard must reflect joint expiry governance as distinct from BAU with parties aspiring to work together on joint, critical milestones. It must also acknowledge that there will be areas of expiry that are non-contentious that can be programmed out and delivered though BAU and there will be other commercially contentious issues that will demand technical and legal input. Separating these early and agreeing how to lead them and how leadership can be mirrored either side of the project agreement i.e. with named persons in the Provider and contracting authority facing off to one another.
In summary we recommend
Doing a review and doing it early
Encompassing both sides of the deal for a review. This is necessary for the review to cover all the stakeholders so that there are improvements from contracting authority down to FM co for mutual gain.Is equitable. To achieve an honest status assessment a common standard should be used and it may be necessary to use independent facilitators or advisers who are not vested in concealing truths on either side.
Technology has moved on since PFI was invented in 1992 amidst the UK’s challenge of meeting financial entry criteria for Maastricht but alas it hasn’t been adopted by contracting authorities and providers alike and there is huge potential to improve systems, business procedures and processes and management information and reporting which drives better transparency and fuels effective operational and commercial governance.
Expiry isn’t BAU. Separate duties and adopt a programmatic approach for large scale and complex contracts.
Expiry Health Checks and expiry preparation must be a joint exercise, recognising the symbiosis, in order to be worthwhile and give any chance of achieving CURSHAW’s E3. If you can’t work on expiry preparation because of legacy disputes or BAU issues getting in the way of expiry preparation the road ahead will be bumpy and risky for all involved.